The Charles Schwab Corp.

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The Charles Schwab Corp.

founded: 1971

Contact Information:

headquarters: 101 montgomery st.
san francisco, ca 94104 phone: (415)627-7000 fax: (415)627-8538 toll free: (800)435-4000 url: http://www.schwab.com

OVERVIEW

Charles Schwab is the largest discount broker in the United States. Unlike a full-service brokerage firm, a discount broker makes trades for clients without suggesting what stocks to buy. Nevertheless, in 1997 Charles Schwab was moving toward providing investors with more financial information and counseling, as well as financial products. Indeed, the company became a major provider of a full range of financial services. It is a leading distributor of mutual funds and offers several of its own funds, known as SchwabFunds. It provides consumers with banking services such as check-writing and a debit card. It offers both personal and company retirement accounts. In addition, through its Mayer & Schweitzer subsidiary, Schwab offers trade execution services to broker-dealers and institutional investors in the over-the-counter market and NASDAQ. As of March 1998, through its principle operating subsidiary Charles Schwab & Co., Inc., Schwab provided financial services for 5 million active accounts with $407 billion in assets through 275 branch offices.

Charles Schwab has been a market leader and innovator in both products and distribution. The company has a strong track record of growth with a net income increasing at an average annual rate of 22 percent over the last 10 years, 36 percent over the last five years, and 35 percent in 1997. In comparison, some of the larger brokerage firms' earnings per share increased at an average annual rate of 21 percent over the last five years. Schwab's primary goals are to continue growth by leveraging its brand name through marketing and advertising, continued development of products and services, expansion and development of its delivery channels, and investment in technology.

COMPANY FINANCES

In 1996 Schwab posted record earnings for the sixth consecutive year. Earnings increased 35 percent to $234.0 million, or $1.30 per share, up from $173.0 million, or $.97 per share, in 1995. Schwab handled over 97 million calls and more than 21 million trades. The trend continued into 1997 with reported net income of $270.3 million, or $.99 per share, on revenues of $2.3 billion. A contributing factor for the increase was the 1.2 million new accounts opened in 1997.

The Charles Schwab Corporation reported net income of $68.0 million, or $.25 per share, on revenues of $604.4 million for the quarter ended March 31, 1998. Net income for the first quarter of 1997 was $66.7 million, or $.25 per share, on revenues of $535.7 million. In the first quarter of 1998 trading activity reached record levels.

Attracting new customer accounts is important in generating revenues. Schwab added 358,000 new customer accounts during the first quarter of 1998, an increase of 20 percent from the 297,000 new accounts added during the first quarter 1997. During the first quarter 1998, 48 percent of total customer trades were executed through online channels, versus 33 percent in 1997.

ANALYSTS' OPINIONS

Charles Schwab's consistently powerful earnings and revenue growth make it a favorite among analysts. In early 1997, many analysts remained skeptical about long-term prospects for the stock. Nevertheless, the brokerage business tends to have sharp ups and downs. With the market due for a downturn and Charles Schwab's stock price already quite high, some analysts were expressing caution about near-term outlook for shares.

Charles Schwab continues to be recognized as a leader. In January 1998 Forbes ranked Charles Schwab among the best companies in its Fiftieth Annual Report on American Industry. The report also referred to Charles Schwab as the "entrepreneur who took advantage of technology to build a giant business from scratch." Also in 1998, Charles Schwab was named the overall winner of the Global Information Infrastructure (GII) Commerce Award. The company was recognized for its use of the Internet and network technology, which produced impressive results.

HISTORY

After some early mishaps in the mutual fund business, Charles Schwab set up a small money-management firm in San Francisco in the early 1970s. In 1975 Congress deregulated the stock brokerage industry, thus ending the power of the New York Stock Exchange to set commission rates. With fixed commissions gone, the door opened for Charles Schwab to start a discount brokerage firm, which took orders to buy and sell securities but did not maintain a large research staff to make specific stock recommendations.

FAST FACTS: About The Charles Schwab Corp.

Ownership: Charles Schwab is a publicly owned corporation traded on the New York, Boston, Cincinnati, Chicago, Pacific, and Philadelphia Stock Exchanges.

Ticker symbol: SCH

Officers: Charles R. Schwab, Chmn. & Co-CEO, 60, 1997 base salary $10,187,229; David S. Pottruck, Co-CEO & COO, 49, 1997 base salary $7,150,039; Timothy F. McCarthy, Pres. & COO, 46, 1997 base salary $1,708,291; Luis E. Valencia, Exec. VP & Chief Administrative Off., 52, 1997 base salary $1,286,061

Employees: 12,700

Principal Subsidiary Companies: Charles Schwab's principal subsidiaries are Charles Schwab & Co., Inc., a securities broker-dealer; Mayer & Schweitzer, Inc.; Charles Schwab Investment Management, Inc., an investment advisor; Charles Schwab Trust Company, which provides custody services for independent investment managers; and Charles Schwab Europe (formerly known as ShareLink), a retail discount securities brokerage firm.

Chief Competitors: The discount brokerage industry is very competitive and the level of competition is expected to increase. Discount brokers can also expect competition from other related industries such as full-service brokers, banks, mutual funds, software development companies, insurance companies, and others. Primary competitors include: Merrill Lynch; Smith Barney; Dean Witter; Paine Webber; Quick & Reilly; Fidelity Brokerage Services; AmeriTrade; Waterhouse Securities; and Olde Discount.

By 1980 Charles Schwab was by far the largest discount broker. In 1983 Bank of America acquired the firm for $55 million. Founder Charles Schwab and a group of investors bought the company back in 1987 for $238 million. In 1991 Schwab acquired Mayer & Schweitzer, which provided trade execution services to broker-dealers and institutional customers in the over-the-counter market. In 1993 Charles Schwab opened its first overseas office in London. The company continued to grow and prosper during the mid-1990s. According to Forbes, in 1995 Charles Schwab ranked fifth among brokerage firms in total assets. Moreover, its 36-percent return on equity was the highest among leading brokerage firms.

STRATEGY

Traditionally, discount brokers offer services for the "do-it-yourself" investor. By eliminating overhead for investment research performed by security analysts, discount brokers have been able to offer trading services at lower costs. But the brokerage industry was changing rapidly. In 1996 Charles Schwab found that some 50 percent of its new accounts had never traded stocks before, compared with just 5 percent in 1987. Since so many investors were inexperienced, Charles Schwab believed it had an obligation, as well as a business opportunity, to provide them with the investment counseling they needed. Thus, Charles Schwab began to offer its customers education and guidance through both computer software and its customer representatives. In February 1997 the company inaugurated Market Buzz, an information service on its web site that offered market news, data, and research. Charles Schwab also provided greater incentives to employees to refer customers to the company's network of 5,000 independent investment advisers. Clients who signed on with these independent investment advisers accounted for nearly one-third of Schwab's assets.

Schwab also distinguished itself through technological innovations. Management estimated that some 40 to 50 percent of all its trades were done through technology-based distribution channels. Some 25 percent of all trades are conducted through Telebroker, an automated, touch-tone telephone service that allows clients to get stock prices and place orders. Charles Schwab also offers trading on the Internet through e.Schwab and other services. Another innovation was VoiceBroker, a telephone system that uses voice-recognition technology to conduct broker services.

Finally, through its nationwide advertising and marketing programs, Charles Schwab worked to create a strong brand name in the stock brokerage business. The company continues to use the positive image of founder Charles Schwab extensively in its advertising, which conveys an image of confidence and reliability. The company uses national and local advertising to expand its client base and relies on referrals by existing clients. The majority of Schwab's ads appear in financial newspapers and periodicals and on national and local cable television and radio stations.

INFLUENCES

One of the most influencial strategies in terms of overall market growth was Charles Schwab's implementation of central servicing centers. The initial service center opened in Indianapolis, Indiana, in 1990 and handled overflow calls from the branches in the eastern United States. In 1991 the company opened a second central servicing center in Denver, Colorado, which managed overflow calls from branch offices in the Midwest and the western United States. The service centers handle Charles Schwab's toll-free numbers, which represent a majority of the company's calls. The brokers in the service centers are available 24-hours-a-day to accept trade orders or answer investors' questions. Approximately 40 percent of the trades executed by Schwab are through the calling center, about 50 percent are done electronically, and less than 10 percent are done through the branches. The company's facilities are strategically located across the United States to offer effective broad geographic coverage for customers.

CHRONOLOGY: Key Dates for The Charles Schwab Corp.

1971:: Founded
1975:: Begins offering discount brokerage services
1980:: Becomes the largest discount brokerage firm
1983:: Bank of America acquires the company
1987:: Charles Schwab and some investors repurchase the firm
1990:: Opens the first central service center
1991:: Acquires Mayer & Schweitzer
1993:: Opens first overseas office, in London
1995:: Employees participate in the AIDS Walk
1997:: Launches Market Buzz
1998:: Company is named the winner of the Global Information Infrastructure Commerce Award

While discount brokerage was taken for granted in recent years, the service was considered unusual when it first appeared in 1975. Charles Schwab successfully used advertising to establish the credibility of the business, and by 1980 it was the largest discount broker. But the costs for these campaigns, as well as spending for advanced computer systems, caused cash shortages that eventually resulted in the sale of the company to Bank of America in 1983. That sale, however, caused its own problems. For example, Charles Schwab wanted to offer its own line of mutual funds, but federal law at the time prohibited banks and their subsidiaries from engaging in this business. While Charles Schwab wanted to challenge the laws, Bank of America was reluctant, since it didn't want to antagonize banking regulators. The tension between Charles Schwab and its parent company was apparent, and in 1987 Charles Schwab and a group of investors bought the company back for $238 million. That year the firm had sales of $465 million and profits of $26 million; it had 1.6 million customers—five times as many as its nearest competitor. It was spending $15 million a year on advertising.

In October 1987, however, the market crashed, and by mid-1988 trading volume had fallen by some 40 percent. Schwab cut costs and executive salaries so that the firm could be profitable on only 8,000 trades a day, compared with 12,000 before the cost-cutting measures took effect. But even with these steps profits fell 70 percent to $7.4 million, based on revenues of $392 million. Unlike the crash of 1929, however, the crash of 1987 did not have a major impact on the economy, and the brokerage business recovered relatively quickly. By 1992 Charles Schwab had 175 branch offices with 2,500 brokers; revenue for the year was $909 million, with profits of $81 million.

The bull market of the 1990s attracted hundreds of thousands of new investors, which greatly benefited Charles Schwab. For the five-year period beginning in 1991, earnings expanded at an annual rate of 36 percent, reaching $234 million in 1996. Revenues grew at a 27-percent pace to $1.85 billion; and customer assets more than doubled between 1994 and 1997 to $253 billion. The stock market rewarded this excellent performance. Between late 1994 and early 1997 Charles Schwab stock rose 275 percent, compared with 160 percent for the industry as a whole. The company continued to spend large amounts on advertising to attract additional new investors—$84 million in 1996, compared with $53 million in 1995.

CURRENT TRENDS

In 1997 Wall Street was focusing its energies on attracting and servicing the small investor who was the mainstay of Charles Schwab's business. The company strived to maintain its edge by delivering innovative products that would keep it a step ahead of the competition. Charles Schwab was particularly successful in the area of mutual funds, where it became one of the leading distributors in the industry. The company expanded the outlets for its distribution of mutual funds to banks and small brokerage firms.

The growth of the Internet was also having a powerful effect on the brokerage business. The Internet has a large amount of financial information available for free, and online brokerages sprang up to service the "do-it-yourself" investor. In an interesting reversal of its traditional role in the industry, in 1997 Charles Schwab was the old, established firm being undercut by young up-starts. When Charles Schwab introduced its e.Schwab service for Internet trading, the basic charge of $29.95 was still twice that of the pioneering E-Trade Group of Palo Alto, California. Indeed, Charles Schwab was moving toward providing more counseling to investors partly because it was losing some of the "do-it-yourself" market to E-Trade and other cheaper Internet brokers.

SCHWAB RECEIVES PRAISE AND CRITICISM ALL IN THE SAME DAY

Charles Schwab had to deal with a lot of angry customers when their system went down for two hours in the early morning of April 20, 1998. Traders were unable to make stock trades through the Schwab web site or through the company's telephone system. Schwab employees couldn't access user accounts or stock information. Customers, however, were able to place free-of-charge, time-stamped trades with operators by telephone or in person at Schwab's 275 branches nationwide. A Schwab spokesperson said the network problems were caused by the crash of a central hub. Ironically, these problems happened on the same day that Schwab's web site was honored with a Global Infrastructure Commerce Award at the Comdex Spring 98 computer trade show in Chicago. Schwab received the award for helping make online stock trading easy and inexpensive.

PRODUCTS

Charles Schwab continued to create new offerings in order to enhance its product line and enhance customer service. In 1996 alone it added SchwabNOW (Internet trading), SchwabPlan (401(k) retirement accounts), SchwabLife (life insurance), and StreetSmart Pro (investment services). Schwab was also considering introducing other deposit and credit services, such as mortgages.

Schwab continued to invest in technology throughout the first quarter of 1998. It increased overall trade processing capacity by nearly 70 percent and enhanced web site capabilities with The Analyst Center™. The latter provided customers with access to investment information and research companies such as Dow Jones, Standard & Poor's, First Call, and Big Charts on individual stocks and industries at no cost. The IRA Analyzer™ is an online investment tool designed to educate investors about retirement planning choices. Also, during the first quarter 1998 the Schwab MoneyLink™ service was expanded to allow customers to use the Charles Schwab web site automated telephone system. Schwab representatives could use the MoneyLink to transfer money between Schwab and other financial institutions.

CORPORATE CITIZENSHIP

The Charles Schwab Corporation Foundation, founded in 1993, is extensively involved in supporting nonprofit programs in local communities. Charles Schwab employees were involved in the 1995 AIDS Walk in more than 20 cities. Coupled with the company's corporate sponsorships, Charles Schwab raised over $125,000 to fight the disease. In an effort to encourage employees to become active in the community in which they live, Schwab implemented a program called Assisting Society through Schwab Employee Teamwork and Service (A.S.S.E.T.S.). Every year one employee is awarded a Community Service Award; Schwab then makes a contribution to the organization of the employee's choice. In the summer of 1995 over 650 Charles Schwab employees in 22 cities helped raise money for breast cancer research by participating in the Race for the Cure. Charles Schwab also double-matched employee contributions to relief funds in Oklahoma City following the bombing of the federal building.

GLOBAL PRESENCE

Charles Schwab's global presence is still relatively small. The great majority of Schwab's business is in the United States; however, it does have a branch office in the United Kingdom. The company also offers multilingual services through Asia Pacific Services and Latinoamericano.

EMPLOYMENT

Charles Schwab has a reputation for agility and technological innovation. As demonstrated by its revolutionary move into the discount brokerage business, it is happy to take on the traditional leaders of an industry and fight for its turf. The company's customer representatives are known for offering excellent service.